Member Article

Beware of the bankrupt seller

With Watson Burton LLP Law Firm

Section 284 Insolvency Act 1986 provides that from the date of the presentation of the bankruptcy order until the date of vesting of the bankrupt’s estate in a trustee in bankruptcy, any disposition of property by the bankrupt is void, except where it is or was made with the consent of the court, or is or was subsequently ratified by the court. These restrictions do not apply in respect of property or payment received before the commencement of the bankruptcy in good faith, for value, and without notice that the petition had been presented.

Since registration constitutes notice, a purchaser (which includes a lessee or mortgagee) of a property in good faith for value will not be bound by a petition or bankruptcy order which, in error, has not been registered by the court. In view of the requirement of good faith, a purchaser with “actual knowledge” of the bankruptcy proceedings will not be acting in good faith and will thus fall within the restrictions of s.284 Insolvency Act 1986.

The Registrar is required, as soon as is practicable after the registration of a bankruptcy petition at the Land Charges Department, to register a bankruptcy notice against any registered property or charge which appears to be affected, thus notifying potential purchasers that the seller is in the course of being made bankrupt. Similarly, the Registrar must, as soon as is practicable after the registration of a bankruptcy order at the Land Charges Department, register a bankruptcy restriction against any registered property or charge which appears to be affected, thus preventing the bankrupt from selling the property personally.

Whilst prudent purchasers will carry out a bankruptcy search against their seller before completion, which will reveal whether the seller is, has been, or is in the process of being made bankrupt, a purchaser or his legal adviser are not required to conduct such a search against the seller of a registered title (s.86(7) Land Registration Act 2002). Thus for registered title, the only registrations which constitute notice are those entered on the registered title itself (i.e. for bankruptcy purposes, a notice following a bankruptcy petition, or a restriction following a bankruptcy order).

If the purchaser’s searches reveal any bankruptcy entries, then the purchaser should not accept a transfer of the property from the seller himself, but should wait instead for the appointment of the trustee in bankruptcy and take a transfer of the property from the trustee directly. The bankrupt cannot be a party to the purchase deed and the “seller” in the deed should be the trustee personally.

If, however, the purchaser’s searches of the registered title reveal no entries regarding the solvency of the seller, and the purchaser is not otherwise aware that the seller is bankrupt or is in the course of being made bankrupt, then he is legally entitled to assume that the seller is solvent and is able to validly transfer the property to him.

If you have any queries in relation to this article or any other insolvency matter, please contact Stephen McLellan at Watson Burton LLP on stephen.mclellan@watsonburton LLPÂ or 0191 244 4444.

This was posted in Bdaily's Members' News section by Ruth Mitchell .